If you have a structured settlement, you may face a need for a large amount of cash ahead of what you expect to receive in your settlement payment schedule. Some people seek to use their structured settlements as collateral for a loan. This is not an option.

Some people inaccurately use the term “structured settlement loan” when they are actually talking about a different transaction: You can sell future structured settlement payments to a company that purchases them.

If you file a lawsuit and the opposing side agrees to settle, you may receive a lump sum or a structured settlement. With a lump-sum settlement, you receive all your money at once, concluding the case. With a structured settlement, you receive a series of payments, typically stretching out over years.

Sometimes, people with structured settlements find themselves in need of an infusion of a greater amount of cash than the immediate settlement payments will provide. They may want an advance on their future payments.

There are a few different approaches you may consider. The words used to describe these transactions are often misused. The law makes some options unavailable. And others can be expensive.

• What is a Structured Settlement Loan?
• Can you Borrow Against a Settlement?
• What are the Pros and Cons of a structured settlement?
• How does the Structured Settlement Work?
• What is the Cost of Borrowing Against Your Future Lawsuit Proceeds?
• Can you Cash out a Structured Settlement?
• How can I get Money Before my Settlement?
• How to Choose the Best Cash Advance Settlement Company
• Is a Structured Settlement a Good idea?
• Are Structured Settlements Tax Free?
• When Are Structured Settlements Not Taxable?

What is a Structured Settlement Loan?

Understanding structured settlements can be confusing at times. A structured settlement pays you money through a serious of payments (known as an annuity) or a lump-sum form of payment.

Read Also: IRS Tax Debt Relief Program

Structured settlements occur when a claimant agrees to resolve a personal injury claim and receiving all or portions of a settlement through payments. When you file a personal injury lawsuit, you eagerly wait for the day when your settlement payout arrives.

However, you may not know about the many detailed decisions involved in the settlement process. For instance, should you accept a lump-sum payment or agree to a regularly disbursed structured settlement? 

Structured settlements produce some distinct advantages, but they’re not ideal for every situation. If you’re considering a structured settlement, you can always sell it later (with court approval) for a lump sum.

Structured settlements first appeared under Canadian law in personal injury cases concerning a 1950’s drug that caused birth defects. From there, structured settlements made their way into common law legal systems, including England, Australia, and the United States. 

Structured settlements took advantage of two changing elements in personal injury law:

• Rising personal injury settlement amounts
• Changing IRS law that waived tax liability

In the US, structured settlements serve as an option in personal injury cases, including pharmaceutical injury and product liability cases. 

The types of cases commonly eligible for a lawsuit loan include …

• Personal injury (someone’s actions cause your injury)
• Auto accidents
• Injuries in the workplace
• Slip and fall (premises liability)
• Medical malpractice
• Product liability (a malfunctioning product causes your injury)
• Wrongful death (someone’s actions or negligence causes the death of a loved one)

Can you Borrow Against a Settlement?

If you were injured in an accident or as a result of medical malpractice, there’s a chance that you’re unable to work. As a result, you could fall behind on your bills.

A settlement advance gives you the cash you need to cover your living expenses and bills before a judgment is issued or the case is settled. You can use the money to pay for your rent or mortgage, car payments, medical bills or even groceries. The advance is yours to use as you wish.

Depending on your agreement, you may not have to repay the advance if you lose your case. The lender typically can’t recoup the pre-funded amount unless you win your case, so risk of loss is part of its business.

And if your settlement turns out to be for less than the amount (principal, interest and fees) you agreed to repay, the lender may not be able to demand the difference. It may only be able to claim whatever settlement proceeds are left over after other prioritized costs have been paid, such as attorney fees and court costs.

But the downside of that situation is that you could be left with nothing at the end of your court case. And remember, you can still end up paying a lot in interest and fees while you await a decision.

What are the Pros and Cons of a structured settlement?

Pros

Settlement loans have some distinct benefits.

• You’ll get money for living expenses. With a lawsuit advance, you’ll get cash to cover your necessary expenses, which can help you keep up with your bills.
• You typically don’t need good credit to get one. Settlement loan companies may not consider your credit when weighing your application and may not run a credit check. Instead, they focus on the likelihood that your case will not only succeed but also result in a settlement large enough to give them a return on their investment.
• You can generally get the loan quickly. Some settlement lenders may be able to approve and fund your advance within hours or days.
• You’ll have more time to negotiate. When you’re pressed for cash, you may feel as if you have to take the first offer the defendant offers you. A settlement loan can give you breathing room in your budget, so you have more time to negotiate a better offer.

Cons

Short-term financing can have significant drawbacks, and settlement loans are no exception. Most notably, they can come with very high costs.

• Settlement loans typically have high interest rates. Interest rates commonly range from 20% to 60% a year. A study by University of Texas School of Law researchers found the average interest rate for settlement loans is 44%.
• Lawsuits can take years to settle. You may get stuck paying interest charges and fees for a long time before you receive a judgment.
• Lawsuit loans are not heavily regulated. Many types of loan products are heavily regulated, but settlement loans are primarily regulated at the state level, meaning each state has its own rules regarding settlement loans. If you have issues with your settlement loan, you should contact the attorney general in your state.

How does the Structured Settlement Work?

To take out a settlement loan, you apply for a loan after filing an eligible lawsuit. The lawsuit loan company evaluates your case’s merit, weighs your chances of winning the suit or the case being settled, and estimates how much you can expect to receive. Based on that information, it may offer you an advance.

But companies that offer settlement loans don’t do so out of the goodness of their hearts — they’re in the business of making money. When they offer lawsuit advances, they profit by charging you interest and fees that you’ll be expected to pay out of any settlement you receive.

Typically, you don’t have to make payments until your case is settled or you receive a judgment. Certain expenses typically need to be covered first, such as attorney fees and the expenses of litigation — then the loan company is repaid from the remainder.

What is the Cost of Borrowing Against Your Future Lawsuit Proceeds?

The “funding fee” can run between 2% to 4% per month. That might sound like a reasonable amount, but it equates to annual percentage rates of 27% to 60% or more. Considering that your lawsuit could take years to resolve, it’s quite possible that you might pay back double or triple the money you borrow.

Repaying the Litigation Funding Lender

The loan is paid from the judgment or the settlement funds after other expenses are covered. When you reach a settlement with the defendant or when you obtain a judgment in court, certain expenses will be paid off the top. These expenses include:

• The attorney’s fee. In personal injury cases, the attorney’s fee is often one third to one half of any recovery you’re awarded.
• The expenses of litigation, like process server fees, copy costs, and court costs.
• Medical liens for services you got from doctors, hospitals, or other medical providers.

When all other expenses are paid, the lawsuit lender gets paid from the remainder.

Example 1: Settlement After One Year

You sue XYZ Insurance Company for $100,000 because of injuries you suffered in a traffic accident caused by one of the company’s insured drivers. A lawsuit lender evaluates your case and offers to lend you $25,000 at 3% per month.

A year later, your case settles for $100,000. The attorney’s fee, litigation expenses, and medical liens total $50,000. Of the remaining $50,000, you must pay the litigation lender the principal of $25,000 plus its funding fee of approximately $12,500. You then receive the remaining proceeds of $12,500.

$100,000 Settlement amount

– $50,000 Attorney’s fee, litigation expenses, and medical liens

– $25,000 Principal repaid to Lawsuit Lender

– $12,500 Funding fee owed to Lawsuit Lender

$12,500 Remainder to You

What If You Lose the Case or Settle for Less Than What You Owe?

On the plus side for the consumer, if you lose your case, you don’t have to repay the loan. This is a risk that the lender takes and one of the reasons the cost of of a lawsuit loan is higher than other types of loans. Likewise, if you settle for less than expected, you will not have to pay more than the amount of your settlement.

Example 2: Settlement After Two Years

Let’s say the case in Example 1 takes two years to settle instead of one. You will owe the lender the principal of $25,000, but the funding fee will balloon to $32,000. In that case, the lender will receive the principal of $25,000 and the remaining $25,000 of the settlement. That leaves a deficit of $7,000. You won’t get anything from the lawsuit settlement, but you don’t have to repay the $7,000 to the lawsuit lending company.

$100,000 Settlement amount

– $50,000 Attorney’s fee, litigation expenses, and medical liens

– $25,000 Principal repaid to Lawsuit Lender

– $32,000 Funding fee owed to Lawsuit Lender

-$7,000

Can you Cash out a Structured Settlement?

With a few exceptions, you can cash out payments from your structured settlement or annuity at any time. However, making early withdrawals may incur costly surrender charges and tax penalties. An alternative to withdrawing money early is selling future payments to a purchasing company at a discount.

Timing is a big factor in choosing when to tap into your annuity money. Depending on when you purchased it, it might make sense to withdraw funds from your annuity, assuming your contract allows this. If you purchased your annuity recently, selling future payments may be a wiser choice.

Unlike people who bought annuities as part of a financial or retirement plan, structured settlement recipients are not allowed to withdraw money early. But you still have options, including selling future payments.

Or, if you haven’t yet received your settlement money, you may qualify for a type of cash advance to cover expenses while you wait.

Annuities provide a reliable stream of cash over a period of time. But your financial needs can change in an instant and may cause you to reevaluate your annuity. This is especially true in cases of medical or financial emergencies and new business opportunities.

Early withdrawals usually come with expensive tax implications and surrender fees. Penalties tend to decrease over time, so if you wait several years, you may face lower fees.

But what if you can’t afford to wait because you need cash now?

You may get more money by selling payments on the secondary market instead of making withdrawals from your annuity account. Selling payments can provide flexibility and immediate access to a large sum of cash that you can invest in other financial vehicles or use to pay off long-term debt.

Reasons for selling an annuity include:

• Job loss
• Medical emergency
• Lifestyle change
• Annuity inheritance

How can I get Money Before my Settlement?

Different companies have different criteria when it comes to qualifying for a settlement advance. At a basic level, you need to have already filed a lawsuit as a plaintiff with an attorney on board representing you. You may also be eligible if you’ve already won your lawsuit or reached a settlement agreement and are simply waiting to receive your funding. Some companies may also have a maximum amount that they’re allowed to fund. 

The type of lawsuit you’re involved in also influences whether or not you qualify. Common incidents include auto accidents, worker’s comp and negligence, premises negligence, and wrongful death.  

How to Choose the Best Cash Advance Settlement Company

There are a few different things to consider when choosing a cash advance settlement company.  

• Check to make sure they operate in your state. They don’t need to be located in your state, but they should be licensed to do business there.  
• Compare offers. Different companies may offer to give you a different percentage of your predicted settlement amount.  
• Find out how much interest they’ll charge you each month before you receive your settlement funds. This is extremely important because it directly impacts how much money you could potentially receive once your case is resolved. 
• Look at how frequently the company compounds the interest. This can add up quickly and interest that is compounded daily or weekly will be more expensive than a longer compounding term when all other things are equal. 

No matter how much financial need you’re in, do be sure to carefully compare offers to make sure you’re making the best decision. You can always ask your attorney for help or meet with a financial advisor if you’re not sure what everything means. A reputable legal advance company should also have a stellar customer service team that can explain everything in clear terms to give you a better idea of what to expect. 

1. USClaims

USClaims is a litigation cash advance provider that offers experience and transparency. With claims fees as low as 2% each month, you can get funding in 48 hours or even less. They fund an extremely wide range of cases for personal injury victims, including anything from medical malpractice to employment discrimination. 

The application process is simple: simply submit an application form and from there a representative from USClaims will review your documentation. If you’re approved, you can sign a purchase agreement and receive your cash advance within one business day. In most cases, you could get pre-settlement funding for up to 10% of the value of your case.  

2. Oasis Financial

When your application gets approved by Oasis Financial, which has an A+ BBB rating, you’ll get funded within 24 hours. Advance amounts range anywhere between $500 and $100,000. Their eligible case list is substantial, meaning if you’re the plaintiff in an existing case seeking settlement, there’s a strong chance you’re eligible to apply.  

3. CaseAdvance 

CaseAdvance boasts a quick turnaround time and efficient processing when it comes to your pre-settlement cash advance. There’s no application fee and you’re not obligated to accept an offer from CaseAdvance once you learn your settlement offer and fee. This makes it a risk-free experience from start to finish. 

4. Peachtree Financial Services

Peachtree Financial Services has been in business since 1996. The Pennsylvania-based company buys payments for annuities, lottery winnings, structured settlements, and more. J.G. Wentworth, another company on our list, bought Peachtree Financial Services in 2011, but the companies operate separately. Peachtree Financial Services is a member of the National Association of Settlement Purchasers and Better Business Bureau accredited with an A+ rating.

Unfortunately, Peachtree Financial Services doesn’t provide a fee structure on its website. You will need to call for minimum settlement details. But the company does a good job of explaining how the process works including the consultation, documents required, and filing paperwork on your behalf.

Peachtree Financial Services prides itself on being accessible, with its phone number on multiple pages of its website. According to ConsumersAdvocate, the team is available seven days a week, making them readily accessible to answer your questions at your convenience.

The average structured settlement transaction takes 60 to 90 days, but it’s possible to get a cash advance within 24 to 72 business hours.

5. Fairfield Funding

Fairfield Funding has been in business since 2008 and focuses on structured settlements and annuity payments. The company is a member of the National Association of Settlement Purchasers. Fairfield Funding is also Better Business Bureau accredited with an A+ rating.

Fairfield Funding charges 6% to 18% to buy structured settlements. The exact price depends on the payment dates, payment amounts, and current economy, according to the company’s website. You will have to call to learn about the company’s policy for minimum payments. The process is briefly outlined on the company’s website and starts with calculating the lump sum value and ends with completing the court documents.

Fairfield Funding makes its phone number visible on every page of the company’s website and also has a responsive live chat. The average structured settlement takes 30 to 45 days, but the company may complete the transaction in fewer than 30. The company also offers a cash advance within five days.

Fairfield Funding offers a 100% guarantee for the following:

• Best price: The company will beat a competitor’s offer or pay you $500.
• Cash now: You are eligible for a cash advance within five days.
• Fixed: The cash advance is fixed with no interest.
• Fast: The company will close your transaction as quickly as the state law allows.

A representative will go over the guarantee details with you when you call for a consultation.

6. DRB Capital

DRB Capital, a subsidiary of DRB Financial Solutions, has been in business since 2007. The Delray Beach, Florida-based company buys structured settlements and annuity payments. DRB is a member of the National Association of Settlement Purchasers. The company is also Better Business Bureau accredited with an A+ rating.

Unfortunately, there are no pricing or minimum settlement details on DRB Capital’s website. Nor does the company disclose its buying process; consumers will have to call to get specific details for their unique structured settlement needs. 

DRB Capital stands out with personalized customer service. You will work with a dedicated representative throughout the entire process—start to finish. Also, the company offers phone support seven days a week in both English and Spanish.

DRB Capital has a history of customer advocacy within the industry, addressing bad actors. The company fights illegal and unethical practices in the structured settlement business through its Stop Structured Fraud program. DRB Capital currently offers a $100,000 bounty to whistleblowers. 

7. Stone Street Capital

Founded in 1989, Stone Street Capital is the oldest structured settlement company on our list. The Rockville, Maryland-based company purchases structured settlements, annuity payments, and prizes like lottery or casino winnings.

Stone Street Capital is a member of the National Association of Settlement Purchasers and is Better Business Bureau accredited with an A+ rating. There are no complaints about Stone Street Capital in the Consumer Financial Protection Bureau database. The company has earned 4.2 stars out of 5 from ConsumersAdvocate. 

Stone Street Capital doesn’t offer pricing or minimum settlement options, instead creating a customized plan over the phone for each customer. Submit information via a contact form or call the toll-free phone number to be paired with someone who can work with you within your state of residence.

There is also a quick way on the website to see if you qualify for a structured settlement buyout that walks you through how much you need and where the money would be coming from to determine eligibility.

Is a Structured Settlement a Good idea?

A lump sum payment is generally preferable to a structured settlement in an injury case, but there are some exceptions.

The majority of settlements in personal injury cases are lump sum payments. A lump sum payment means that the defendant (or the defendant’s insurance company) makes one payment to you, and that payment settles the case. However, instead of a lump sum payment, some plaintiffs opt to have their compensation paid out in a structured settlement.

A structured settlement is when part or all of the settlement amount is paid to the plaintiff over a period of years. Part of the settlement will generally be paid to the plaintiff and his/her lawyer immediately after the settlement as a lump sum, and the rest will be structured over a period of years. Some structured settlements even involve lifetime payments.

The lump sum settlement is the traditional method for settling a case. The defendant sends you a check, you cash the check, and the case is over. You should take a lump sum settlement for all small settlements and most medium-sized settlements (less than $150,000 or so).

But if you are settling a larger case, there are two good reasons for doing a structured settlement.

First, the structure guarantees that you won’t spend the money too fast. Sadly, many personal injury plaintiffs who receive large windfalls blow through the money in an astoundingly short time, and then, maybe two or three years later, have nothing left.

Second, the structured settlement saves you money on your taxes. While the money that you receive in a personal injury settlement is usually not taxable, you do have to pay taxes on the interest and dividends that you receive on the settlement money after you invest it. That can be a large tax payment every year. With a structured settlement, you have far less money sitting in the bank, and thus a much lower tax obligation.

Are Structured Settlements Tax Free?

In most cases, selling the payments from your structured settlement does not result in a tax liability. But state and federal laws outline some situations when taxes must be paid, and you should always consult a tax professional for information about your specific situation.

You have a structured settlement providing a reliable stream of payments, but you need a larger infusion of cash now. So you consider selling some of your future payments and wonder if you will incur tax consequences and have to pay the Internal Revenue Service.

The good news is that in most cases you won’t have to pay taxes on the proceeds from the sale of future structured settlements payments.

You will have to jump through some legal hoops, however. And there are some rare cases in which taxes will be due.

The general rule is if a structured settlement is not taxable, then selling the payments also is not taxable, as long as the contract provisions don’t change and the sale follows the law.

The law imposes several requirements on such sales, including oversight and approval by a judge.

When Are Structured Settlements Not Taxable?

The IRS and state governments are barred from taxing most structured settlement income — whether it’s paid all at once or in installments — under the federal Periodic Payment Settlement Act, which was passed in 1982 to ensure that structured settlements continued to provide financial security to those who received them.

The government views these payments as a way of keeping injured people from relying on public assistance, thereby benefiting American taxpayers, as well as the injured party. Structured settlement holders enjoy the benefit of not having to pay taxes on these payments.

The tax exclusion extends to interest and dividends earned by funds in structured settlement accounts.

Some Settlements Are Taxable

The U.S. Supreme Court ruled in 1995 that some proceeds from lawsuit settlements — for example, in cases involving lost wages for discrimination or emotional distress not caused by physical injury or illness — would be subject to income taxes.

Also, the IRS states that any compensation for punitive damages — the kind designed to punish the wrongdoer, rather than to assist the victim — is subject to taxes. This holds even if the punitive damages are part of a personal injury settlement.

Although taxable structured settlements are rare, it’s best to confirm the status of your contract before attempting to sell your payments.

Personal Injury and Wrongful Death Settlements

In every case, any installment or lump-sum payments due to personal injury and wrongful death claims are exempt from federal, state and local taxes. The tax-exempt status includes capital gains or any interest earned throughout the duration of installment payments.

Read Also: Ever Heard of the Pink Tax? If not, you Might be Paying it Unknowingly

Consequently, any sales of structured settlement payments in these types of cases also are tax exempt, as long as the sale follows all applicable law, including receiving the appropriate court approval.

Workers Compensation Settlements

Insurance companies can also issue annuity contracts to fund settlement payments in workers compensation cases that involve physical injuries or illnesses suffered in the workplace.

Section 104 (a)(2) of the Internal Revenue Code mandates that damages from on-the-job physical injuries or illnesses cannot be considered income, so they are not subject to taxation.

Additionally, settlement recipients can sell their future payments with the tax-free advantages in place, as allowed by Section 130 of the IRC.

Summary

Structured settlement loans can be the answer to your financial woes while presenting no risk to you or your credit record. Structured settlement funding is actually a cash advance on a lawsuit settlement you’ve already won, either speeding up the payment process or trading small payments over time for a lump cash payment today.